PL First Cut – Tata Steel 2QFY24

PL First Cut – Tata Steel 2QFY24 – Tushar Chaudhari – Research Analyst, Prabhudas Lilladher Pvt Ltd

Tata Steel (TATA IN, CMP 116, TP Rs144, BUY) 2QFY24 results: Operationally In-line TSI; all eyes on capex execution; weak pricing in Europe may continue hurting TSE

☘️ Tata Steel’s (TATA IN, CMP Rs116, Mcap Rs1,425bn, BUY) 2QFY24 consolidated EBITDA declined 30% YoY to Rs42.7bn (-18% QoQ; lower than PLe of Rs47.7bn) on weak performance from European operations. Indian business delivered strong operating performance with EBITDA growth of 45% YoY to Rs67.5bn (In-line with PLe of Rs68.2bn).

☘️ India: Std. sales volume was flat QoQ at 4.82mn while average realization declined 4.6% QoQ to Rs68,928/t resulting revenue declining 4% QoQ to Rs332bn (PLe Rs312bn beat on realization). EBITDA grew 2% QoQ to Rs67.5bn (largely In-line with PLe of Rs68.2bn; up 45% YoY) on account of lower coking coal prices of prior period inventory. EBITDA/t grew 2% QoQ to Rs14,006/t Vs PLe of Rs14,159.

☘️ RM cost per ton declined 3% QoQ to Rs30,300/t while other expenses declined 12% QoQ to Rs20,945/t on lower royalty, FX impact and power cost.

☘️ TSE: Tata Steel Europe (TSE) EBITDA loss widened further QOQ to USD169/t from USD96/t in 1Q as sales volumes declines 9% QoQ to 1.81mt (subdued demand) while realization improved 4% QoQ to USD1,359/t. TSE reported EBITDA loss of GBP 242mn in 2QFY24 (GBP -152mn in 1Q).

☘️ Tata Steel Netherlands (TSN) volumes were lower due to ongoing relining while RM cost was higher due to higher purchase of slabs. TSUK saw decline in steel prices while jump in other expenses on emission rights related costs.

☘️ Exceptional items: TATA had infused funds of USD4.2bn in the form of loans to T Steel Holding Pte. Ltd. (wholly owned subs) in the past. During 2QFY24, outstanding loan has been converted into equity based on fair value of shares of T Steel Holding Pte. Ltd. And accordingly carrying value of Rs341.7bn as on 30th sept’23 has been recorded as investment in equity shares.

- Exceptional items in cons. P&L of Rs 68.9bn includes a) An impairment charge of Rs26.31bn for heavy end assets at Tata Steel UK (TSUK) which are expected to be used only for defined period, b) a provision of Rs24.25bn is made during the quarter towards restructuring costs (potential asset closure & redundancy cost). Considering both these charges, carrying value of investments (Rs341.7bn) & other financial assets held by T Steel Holding Pte. Ltd. has been tested for impairment and charge of Rs125.6bn been recognized in std. P&L which is included in exceptional items (In-line) and resultant the loss on std. entity .

☘️ TATA board has approved amalgamation of its seven companies into itself with earlier published share exchange ratio.

☘️ Capex: Rs45.5bn spent on capex in 2QFY24 taking 1H capex to Rs86.4bn. 5mtpa expansion at Kalinganagar is on priority & 0.75mtpa EAF at Punjab is under implementation.

- Gross debt remained flat at Rs 897bn while net debt increased from Rs714bn to Rs770bn taking net debt/EBITDA to 2.07x.